Term to understand for Hotels specifically: REVPAR

The Players
Acquisitions Focused:
Description: Groups that focus on acquisitions, as the name implies, acquire existing properties
that have already been built. These are generally either private equity or institutional players.

Stabilized Core Acquisitions: Purchasing a stabilized core property means you are acquiring
a property that is fairly new, high end and fully leased. It will have a low return threshold
because there is minimal debt. Lower risk, lower reward.

Value Add Acquisitions: Value-Add strategy is when you acquire a property that is either very
old or underperforming. You acquire it in the hopes that you can add improvements to it either
through renovations, increasing rent, better management or more. The idea is you buy a class B
property and can turn it into a class A. If you successfully do this you can substantially increase
the value of the property. Higher risk, higher reward.

Opportunistic Acquisitions: This is the general concept as value add acquisitions but the
property is likely even more distressed. An example would be acquiring a completely empty
apartment complex that has been condemned, applying substantial and expensive renovation
capital and then beginning the re-leasing process. Highest risk, but highest reward.

Article for Further Reading on Different Strategies

Example Acquisition Companies: Blackfin Real Estate, Blackstone, Gamma Real Estate

Development Focused:
Description: Development is when a real estate company purchases land and builds a property
completely from the ground up. One should not confuse a developer with a construction
company however. A Developer is the “puppet master” that looks over the construction,
architectural, legal and policy side of creating a building. They run the show. Being a developer
in most instances is the highest form of risk and reward since the most value is being created.

Merchant Developer: The strategy of a merchant developer is develop a property and then sell
it shortly after. They will sell either on a 3, 4 or 5 year horizon generally. The longer they wait
during lease up the more value they create in the property.

Long Term Holder: A long term holder for a developer, builds a product and holds for the
foreseeable future. They might not sell for 10+ years or ever. They build in order to obtain the
cash flow.
Example Rendering

Example Development Companies: Douglas Development, Wood Partners, The Meridian Group

Lenders:
Description: Lending institutions are some of the biggest aspects of real estate. They supply the
market with the necessary capital real estate general partners need in order to pull off these
large and capital intensive projects. Lenders can be banks, insurance companies, private
lenders, some government agencies (HUD, Freddie Mac, Fannie Mae, etc). There are also
many groups that invest in debt packages. These packages are usually bundled up packages of
many loans put together. Usually the lender is the least risky part of the capital stack since they
are first in line for payments in all instances.

Commercial Real Estate Loans Investopedia

Example Debt Companies: Blackstone Mortgage Trust, CrossHarbor Capital Trust

Brokers:
Description: Brokers are a third party resource. They find deals. In most instances, they
represent owners of real estate, creating marketing packages and then negotiate on the owners
behalf. They are paid on pure commission. They also do services as providing values for
owners who are curious how much their property is worth.

Example Brokerage Companies: CBRE, JLL, Newmark Knight Frank, Cushman

Commercial Real Estate Investopedia

Most Important Real Estate Finance Return Metrics

For Deal Analysis

Understanding these terms are very important aspects of being a real estate analyst. These are
the main metrics you will be dealing with in your day to day analysis. These terms are the
building blocks of a real estate financial model. This is what you are solving for.

Cap Rate: Investopedia Capitalization Rate -

Internal Rate of Return (IRR): Crowd Street IRR Article

Cash on Cash Return: Investopedia Cash on Cash Return

Discounted Cash Flow Analysis: Investopedia DCF

When running a model for a potential acquisition you are usually doing some sort of DCF
analysis on an either 5 or 10 year horizon.
Adventures on CRE for DCF modeling and using DCF for coming up with values

Raising Capital Basic

Introduction: One of the biggest obstacles in real estate is that the transaction sizes are very
large so the industry as a whole is very capital intensive. Therefore, almost every player sources
debt for their acquisition. But even for the down payment, there is a need to raise capital. For
example if a property is valued at $20,000,000. A bank says they will lend to you in order to
purchase the property but you need to put “skin in the game” and put down 30% of the property
value. That would be an equity requirement of $6,000,000. For a lot of companies that is still a
lot of money and they need to raise capital from investors to pay for the 6 million. Usually our
clients (the general partner) put down around 5% - 15% of this value. So in this example 10% of
6 million is $600,000 and then they would need to raise 5.4 million from investors. The 5.4
million raised is considered the LP or limited partner capital. Below are the players you generally
turn to in order to raise this money.

Investing in Private Equity Investopedia

High Net Worth Investors (HNWI): Sometimes real estate companies when raising money
focus on high net worth individuals. This name is self explanatory. Rich people that are
accredited investors. Often they made their wealth somewhere outside of real estate and want
to invest in these deals to share in the returns. What makes them attractive to real estate groups
is they are less sophisticated since they are not real estate experts so they will listen to your
strategy. Oftentimes when they invest in the deals, they become completely illiquid because
they cannot exist until the general partner decides to do so.

Institutional Capital: Institutional investor Investopedia Institutional capital is the largest source
of capital and sometimes invests billions and billions to various deals. The people running the
institutional capital firms usually do so on the behalf of pension funds, large endowments,
insurance companies, and more. They usually are fairly safe and conservative with their
investments. They will have many rules when they choose their deals and they
Crowdfunding: Crowdfunding is a newer strategy with a heavy tech influence in order to have
retail investors at a high volume invest in projects and acquisitions. They usually have an online
platform and advertise to a very large audience.
Example Companies: Fundrise, Real Crowd

Real Estate Capital Structure Basic

How the Sponsor ( General Partners - Generally Who

Are Our Clients) Make Money: AKA FEES

General Private Equity Lingo (Not Real Estate)

Good Article on Fees

Introduction: We believe it is very important for Gallagher & Mohan analysts to understand
how our clients make money. Properties produce income and therefore profit is made that way,
but there are also fees taken from investors where our clients really make their money.
Oftentimes the fees are the most important aspect of their business. Below are some common
fees. Understanding real estate private equity and development fee structures is very important
to understanding our clients business. The article above is a good resource to understand how
fee structures work as well.

Acquisition Fees: The acquisition fee is the fee general partners (GP’s) charge investors for
successfully finding and acquiring a real estate property that fits into their investment criteria.
This ranges from .25% - 1% generally speaking of the acquisition value. So for example, if the
property is worth $10,000,000 and the acquisition fee is 1%, then the fee paid to the GP is
$100,000.

Development Fees: For development projects there is generally a development fee for the
project. This is usually based on the total costs of the project. This fee is generally higher than
an acquisition fee. The fee ranges from 3% - 6%.

Administration Fees: Deals incur annual ongoing costs for investor and tax reporting, audits
and other third-party costs. This fee tends to be .1% to .2% on invested equity per year and is a
cost to the deal and investors, but paid to third-party vendors.

Asset Management Fees: Once a property is acquired or developed, then the GP needs to
manage the assets and look over the portfolio. There is a fee associated with this as well, called
an asset management fee. This is generally based on the amount of capital invested. Take
note, that does not mean it is based on the total real estate value managed, but instead on the
amount of equity (not including debt) managed. So for example if a real estate portfolio is worh
50 million and it is 25 million equity and 25 million debt, then the asset management fee (1%
assumption) would be $250,000. This is an annual recurring fee. This fee is meant to help pay
the salaries and expenses of an asset management team.
Good Article on What Exactly an Asset Manager Does
Good Article on Real Estate Portfolio Managers

Property Management Fees: Oftentimes our clients also have property management
companies that run the actual, on-site day to day operations of properties. This is called a
property management fee. It is usually a percentage (3%-5%) on the gross revenue of the
property.

Investor Waterfalls: A waterfall system also known as a promote structure is an important part
of the capital structure when it comes to raising capital from investors. At a high level an
investor waterfall is how an investor rewards the general partner for doing all the work in the
investment. The limited partner (investor) does this because they are completely passive and
not putting in any work, only investing capital. Waterfalls are always structured differently, but
usually the investor gets some sort of “preferred return” and then there are multiple tiers. Once
the return metric passed the tier, the GP and the LP received different percentages of returns.
The GP gets a return that goes higher than their investment share.

Good Article on Promotes and different Waterfall Structures

Example

Profit Split

Preferred Return with Waterfall Split

 Annual Cash Flow Promotes: There are often promotes and waterfalls structures in
place for yearly cash flow. This is usually based on beating some sort of annual cash on cash
return.

Exit Sale Promotes: Along with the annual cash flow promotes, there usually are
promotes based on the final exit of the investment (aka the sale or the refinance). The return
metric the exit promote is usually based on is IRR (internal rate of return)

This is an important topic so please see more articles on the matter:

Crowd Street: What is a Real Estate Sponsor

Investopedia Article on Waterfall Distributions

Valuations

Introduction: An important part of real estate is figuring out the value of a property. Owners
want to know what the value is so they can determine if they should sell or continue to hold.
Potential buyers need to research their acquisition targets value as well so they make sure they
offer a fair price. Brokers need to learn how to come up with values as well so that they impress
their clients and also properly market the property during a sale to potential buyers.

Cap Rate: This is one of the important financial terms in commercial real estate. The cap
rate is the simple formula that is used to showcase the risk and potential returns of an
asset. It is crucial in a quick glance at a property. When determining value of a property,
a cap rate is often used backwards by looking at the net income of the property and what
the market is for cap rates for that asset class. The formula is:

Net Operating Income/Value = Cap Rate

Example: $550,000/$10,000,000 = 5.5%

Net Operating Income/Cap Rate = Value

Example: $550,000/5.5% = $10,000,000

Investopedia Capitalization Rate

Read the Article Below on All of the Different Valuation Techniques. Read it closely. This
is good information.

https://www.reonomy.com/blog/post/commercial-real-estate-valuation

How to Find a Deal

A very important part of real estate is finding the properties to potentially buy. If you can find
deals, real estate groups will always value you greatly. There are many different ways to find
deals, but overall it takes discipline and following a system. Like a sales position, it is a numbers
game. The more properties you reach out to about purchasing, the higher the chance that you
will be successful. Below are some basic methods.

On-Market: As mentioned before in commercial real estate there is a huge network of buyers
that are always looking for “listings” in other words properties to sell. Once they get a listing,
they blast the deal out to all the major players. This is the easiest way to find a deal, but most
likely the hardest way to win a deal. The deal will be highly competitive

Off-Market:Since a lot of deals that are on market are highly competitive, there is great value in
finding off-market deals as well. This is usually the role of an acquisitions manager. The
acquisition manager first needs to find a deal, and then runs the various financial analysis to
decide if it is a deal the firm they work for wants to pursue. Since these deals are not known to
the general public, they are way less competitive. Therefore, sourcing off market acquisitions is
usually way more appealing when compared to “on-market” transactions.

These are techniques to finding off-market deals

 Cold Calling: The old fashion technique of “picking up the phone and dialing” still works.
The first step is to come up with a list of properties that on paper seem to fit the investment
criteria. Then we begin calling the owners to see if they might be interested in selling.

Email Blasting: Sending email blasts to a curated list of potential sellers is also a time
effective way of outreach. Basically you periodically (monthly as an example) send out email
blasts with your acquisition criteria and the basics of what you are looking to do.

Direct Mail:This is a very classic approach but it works as well. This is the process of
sending physical items through the mail. It is the same thinking as emailing but a way to
potentially stand out. A physical item in the mail might look more appealing and you will be more
memorable than all the email that stuff’s people inboxes.

Terms and Definitions

Adventures in Commercial Real Estate

https://www.adventuresincre.com/glossary/

This is a very good resource that shows you definitions of terms and has an excel background
to explaining it

https://www.adventuresincre.com/glossary/discounted-cash-flow/ (Important one that also

leads you to other important terms)

Other Resources

Debt-coverage ratio (DCR) Ratio of net operating income to annual debt service. Expressed
as net operating income divided by annual debt service. Investopedia Debt Service Coverage
Ratio

Common ways to value Real Estate

Triple Net Lease

Gross Lease

Absorption: The amount of inventory or units of a specific commercial property type that
become occupied during a specified time period (usually a year) in a given market, typically
reported as the absorption rate. Investopedia Absorption

Real estate investment trust (REIT): An investment vehicle in which investors purchase
certificates of ownership in the trust, which in turn invests the money in real property and then
distributes any profits to the investors. The trust is not subject to corporate income tax as long
as it complies with the tax requirements for a REIT. Shareholders must include their share of the
REIT’s income in their personal tax returns. Real Estate Investment Trust

Amortization: The repayment of loan principal through equal payments over a designated
period of time consisting of both principal and interest. Amortization

Feasibility analysis: The process of evaluating a proposed project to determine if that project
will satisfy the objectives set forth by the agents involved (including owners, investors,
developers, and lessees).

Gross leasable area (GLA): The total floor area designed for tenant occupancy and exclusive
use, including basements, mezzanines, and upper floors, and it is measured from the center line
of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is
the area that produces income.

Useable area: Rentable area, less certain common areas that are shared by all tenants of the
office building (such as corridors, storage facilities, and bathrooms). Also defined in office
buildings as the area that is available for the exclusive use of the tenant. Useable area =
rentable area × building efficiency percentage.

Ground lease: A lease of the land only. Usually the land is leased for a relatively long period of
time to a tenant that constructs a building on the property. A land lease separates ownership of
the land from ownership of buildings and improvements constructed on the land. Gross Lease
Investopedia

Vacancy rate: The percentage of the total supply of units or space of a specific commercial
type that is vacant and available for occupancy at a particular point in time within a given market

Net present value (NPV): The sum of all future cash flows discounted to present value and
netted against the initial investment.

Basis: The total amount paid for a property, including equity capital and the amount of debt
incurred.

Depreciation: The loss of utility and value of a property.

Capital gain: Taxable income derived from the sale of a capital asset. It is equal to the sales
price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and
recapture of straight-line cost recovery.

Tenant Improvement Allowance: In a commercial lease negotiation, a tenant

improvement allowance (also referred to as a TA, TIA, TI allowance and leasehold
improvement allowance or cash allowance) is an agreement from the landlord to
compensate the tenant for all or a portion of the funds required to construct the
commercial space.
https://www.leaseref.com/blog/tenant-improvement-allowance-complete-guide

Capital expenditures: Property improvements that cannot be expensed as a current operating

expense for tax purposes. Examples include a new roof, tenant improvements, or a parking
lot—such items are added to the basis of the property and then can be depreciated over the
holding period. Distinguished from cash outflows for expense items such as new paint or
plumbing repairs (operating expenses) that can be expensed in the year they occur. Also see
operating expenses.

Common area maintenance (CAM): Charges paid by the tenant for the upkeep of areas
designated for use and benefit of all tenants. CAM charges are common in shopping centers.
Tenants are charged for parking lot maintenance, snow removal, and utilities.

Time value of money (TVM): An economic principle recognizing that a dollar today has greater
value than a dollar in the future because of its earning power.
Adventures in CRE: TVM

1031 Exchange: Under Section 1031 of the Internal Revenue Code, like-kind property used in a
trade or business or held as an investment can be exchanged tax-deferred. Under a fully
qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital
gains taxes are deferred until the newly acquired real estate is disposed of in a taxable
transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation
should not occur as long as the original investment remains intact in the form of (like-kind) real
estate (like-kind refers to real property as such, rather than the quality or quantity of property).

Industrial property: Commercial properties that are used for the purposes of production,
manufacturing, or distribution.
Sale-leaseback: A leasing and financing strategy in which a property owner sells its property to
an investor, then leases it back. This strategy frees capital that otherwise would be frozen in
equity.

Securitization: The phenomenon of indirectly investing in real estate markets in ways that
minimize risk (for example, investments made collectively with pooled money or the use of
investment packages/funds, such as mortgage backed securities sold on the secondary
financial market) as opposed to direct investments where investors own property or hold
mortgages; a long-term trend that has had significant impact on real estate values.

Sublease: A lease in which the original tenant (lessee) sublets all or part of the leasehold
interest to another tenant (known as a subtenant) while still retaining a leasehold interest in the
property. Also known as a sandwich lease due to the sandwiching of the original lessee
between the lessor and the subtenant.

Total effective rent The total dollar amount (cash flow) that the tenant actually will pay out over
the entire period analyzed.

Submarket: A segment or portion of a larger geographic market defined and identified on the
basis of one or more attributes that distinguish it from other submarkets or locations.

Zoning: The designation of specific areas by a local planning authority within a given
jurisdiction for the purpose of legally defining land use or land use categories.

Yield: A measure of investment performance that gauges the percentage return on each dollar
invested.